Japan Relaxes Monetary Policy - 2001-09-18

The Bank of Japan has decided to relax monetary policy and cut its discount rate, in a concerted effort with central banks in the United States and Europe to quell fears of a global recession and stabilize markets shaken by last week's terrorist attacks on New York and Washington.

The Bank of Japan said it is cutting its official discount rate to a historic low of 0.10 percent, from 0.25 percent, effective Wednesday.

The decision follows similar moves by the U.S. Federal Reserve and the European Central Bank, which both lowered key interest rates Monday in a bid to boost investor and consumer confidence. Monetary authorities in several European countries, Taiwan and Hong Kong also cut their benchmark interest rates.

The official discount rate, the interest that Japanese central bank charges financial institutions for loans, is mostly symbolic, since banks can get cheaper funds in the interbank market. The Bank of Japan already lowered interest rates to near zero earlier this year, so what it could do was more limited than its counterparts in other nations.

Some analysts say they believe the Bank of Japan rate cut aims to demonstrate that it is taking action to cut borrowing costs and pump more money into the anemic Japanese economy. The central bank injected two-trillion yen, about $17 billion, into the markets after the terrorist attacks last week as an emergency measure.

Japanese officials have repeatedly stressed the need to work closely with the United States and Europe to prevent the attacks from setting off a domino-like crash in the world's economies. However, Bank of Japan Governor Masaru Hayami followed the rate cut by repeating his call for speedy implementation of Prime Minister Junichiro Koizumi's economic reform plan, which would attack the problem of bad loans held by Japanese banks, cap government borrowing, reduce public works spending, and close or sell state-run businesses.

The yen rose 0.29 yen to 117.47 against the dollar after the central bank move. The Nikkei stock average rose 441 points, or 4.6 percent. It later retreated, closing 175.47 points higher (about 1.8 percent) at 9,680.

A series of hoax bomb threats Tuesday caused the evacuation of several Tokyo-area buildings, including the Tokyo offices of some American financial institutions.